Refer to the information provided in Figure 11.5 below to answer the questions that follow.
Figure 11.5
-Refer to Figure 11.5.If the money supply decreases from to ,

Question

Refer to the information provided in Figure 11.5 below to answer the questions that follow.
  Figure 11.5
-Refer to Figure 11.5.If the money supply decreases from to ,

Quizplus · Accepted Answer

According to the graph, a decrease in money supply causes a leftward shift of the money supply curve from MS1 to MS2. This causes the interest rate to increase from 4% to 6% to bring the money market back to equilibrium. Therefore, the best choice is C. Choice A is incorrect because money demand does not have to increase for the money market to return to equilibrium. Choice B is incorrect because the interest rate does not fall when the money supply decreases. Choice D is incorrect because the money market can return to equilibrium even if the money supply is not decreased to its original level.

Refer to the Information Provided in Figure 11